Small ETF Naysayers Are At It Again In 2013

A prominent theme among ETF industry observers from 2012 has, unfortunately, remained in play in 2013. That theme is the ongoing attacks on, criticism of and fear-mongering pertaining to ETFs with small assets under management tallies and low average daily volume.

Incorrect interpretations of ETF liquidity have started to border on dangerous. For example, one noted commentator recently said he prefers the iShares MSCI Japan Index Fund (NYSEARCA:EWJ) over the WisdomTree Japan Hedged Equity Fund (NYSEARCA:DXJ).

DXJ itself is large with over $3.6 billion in AUM, and robustly traded with average daily turnover north of 1.9 million shares. In other words, it is not the type of ETF experts would tell investors to stay away from on the basis of size.

Still, just as some banks are "too big to fail," many professional and retail investors see some ETFs as "too small to embrace." In this case, it pays to remember the famous quote from the late New York Senator Daniel Patrick Moynihan: "You are entitled to your own opinion, but you are not entitled to your own facts."

The fact is, over 140 ETFs and ETNs have delivered year-to-date returns of 10 percent or more, according to Finviz data. Plenty of members of that group are well-known, heavily traded names such as DXJ and the iShares Dow Jones US Home Construction Index Fund (NYSEARCA:ITB). Others are not. Here are a few examples of what the assets/volume crowd has missed out on in 2013:

SPDR S&P Transportation ETF (NYSEARCA:XTN) Yes, the popular iShares Dow Jones Transportation Average Index Fund (NYSEARCA:IYT) has a rival, and it is the unheralded SPDR S&P Transportation ETF. To be fair, XTN is up just under 10 percent year-to-date with a gain of 9.87 percent, but that is good enough to be about 80 basis points ahead of IYT.

XTN is home to more stocks with 38 compared to 21 for IYT, and that means the SPDR fund is home to smaller transportation names.

However, the two funds have many of the same holdings, but IYT still has average daily volume that is about 100 times that of XTN's. Still, long-term investors should note XTN has been the better performer over the past two years, and it is the cheaper of the two ETFs with an expense ratio of 0.35 percent compared to 0.46 percent for IYT.

iShares Dow Jones U.S. Broker-Dealers Index Fund (NYSEARCA:IAI) With scores of ETFs tracking the financial services sector on the market today, it is not surprising that a few go overlooked. Such is life for the iShares Dow Jones U.S. Broker-Dealers Index Fund.

On the surface, IAI is an ETF the critics should love to hate. It has just $71.2 million in assets under management -- a small sum for an ETF that is nearly six years old -- and it trades less than 42,000 shares per day.

A deeper look shows it is hard to call IAI an "illiquid" ETF. Of the ETF's top 10 holdings, which represent over 59 percent of its weight, Raymond James (NYSE:RJF) is the least heavily traded with average daily turnover of almost 651,000 shares. Ignoring IAI's underlying liquidity means investors have missed out on an almost 16 percent year-to-date gain.

PowerShares Energy Exploration & Production Portfolio (NYSEARCA:PXE) The PowerShares Energy Exploration & Production Portfolio is a dichotomy of sorts. With nearly $107 million in assets, it meets the much lauded $100 million in AUM watermark that so many folks look for. On the other hand, PXE's average daily volume is less than 47,000 shares.

Over the past two years, PXE has surged almost 21 percent, giving the fund a stunning out-performance over XLE and VDE.

That trend has continued in 2013, as PXE is up nearly 14 percent. VDE is higher by just 7.1 percent.

Disclaimer: Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

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